pair trading overlay charts using a ratio for accurate relative moves
I have been trying to do pair trading but I do not think I have an accurate set up.
What I have been doing is overlaying 2 pairs of currencies and when there is a divergence between to highly correlated pairs, I sell one and buy the other and hope they join.
The problem I face is inaccuracy of the chart overlay because the graph scale shifts.
If the scales are different, the charts cannot be relied upon when placing trades according to divergence or convergence.
Example GBP USD is 1.6 and EUR USD is 1.3 and because the charts scales are not the same, GBP USD seems a lot more volatile than EUR USD (even when it is not) because 1.6 is greater than 1.3.
I need a graph overlay using the same scale for both instruments so that their relative moves can genuinely be compared. I think the charts need to have a ratio so it's genuinely represented.
Does anybody know of charting software that can give me an accurate divergence reading between the 2 currencies?
This seems to be a problem with pairs, spreads , and calendar spreads. When plotting the difference between
A and B (B-A) the close values may occur at different times. This gives inaccuracies in the chart. I think most
people use the ratio of the two, and results seem better if the time frame is 30 minutes or larger.
I may be wrong , but I don't think the ratio plot of B/A is available in Ninja Trader.